MGM Credit Rating Confirmed by Moody’s, but Outlook Cloudy With Chance of Downgrade

Posted on: April 14, 2020, 08:51h. 

Last updated on: April 14, 2020, 11:40h.

Todd Shriber @etfgodfather Read More

Expertise: Financial, Gaming Business, Mergers and Acquisitions.

MGM Resorts International’s (NYSE:MGM) credit rating was confirmed at “Ba3” by Moody’s Investors Service. But that confirmation came with a “negative” outlook, indicating the Mirage operator isn’t yet out of the woods when it comes to a downgrade.

With US casinos shuttered by the coronavirus, ratings agencies are issuing lower grades on debt issued by gaming operators. They are hitting those companies with “negative” outlooks or both, as the industry grapples with a zero-revenue scenario, with no near-term end in sight. Moody’s call on MGM comes about three weeks after Fitch downgraded the Mandalay Bay operator, also tagging it with a “negative” outlook.

The confirmation of the company’s Ba3 corporate family rating (CFR) reflects MGM’s good liquidity, including sizable cash balances, aided by revolver drawdowns, and the ability to withstand a meaningful but temporary cash burn from weakened operating performance and facility closures related to the coronavirus,” said Moody’s in a note obtained by Casino.org.

MGM’s grade has “speculative elements” and “is subject to substantial credit risk.” At “Ba3” on the Moody’s scale, the gaming company has the lowest of the three “Ba” ratings and is just one notch above “B” status – grades that carry high credit risk.

Lacking Visibility

Credit raters are proving eager to assign “negative” outlooks and lower ratings to gaming companies. That’s because there’s little visibility as to when the US economy will reopen and how the casino business will look after that happens. Gaming venues in Nevada – the largest domestic gaming market – are expected to remain closed through the end of April, but that timeline was already pushed back once and now states are also extending coronavirus closures.

“The negative outlook reflects the uncertain duration and recovery from the coronavirus-related earnings and cash flow pressure, which will lead to higher debt (from the revolver draw or other debt offerings) and leverage even when property earnings recover,” said Moody’s. “Earnings will decline due to the disruption in casino visitation resulting from efforts to contain the spread of the coronavirus, including recommendations from federal, state and local governments to avoid gatherings and avoid non-essential travel.”

MGM stock yields 4.31 percent. The company hasn’t commented on its payout, but it did scrap a $1.25 billion buyback plan last month.

A New Normal?

Potentially weighing on consumer discretionary companies, including gaming operators, is that when the coronavirus situation eases, consumer spending tastes may shift. Over the past three weeks, nearly 17 million Americans filed for jobless benefits, indicating that if casinos, movie theaters, and theme parks soon reopen, audiences for those activities could be limited.

“The negative outlook also reflects the negative effect on consumer income and wealth stemming from job losses and asset price declines, which will diminish discretionary resources to spend at casinos once this crisis subsides,” said Moody’s. “MGM remains vulnerable to travel disruptions and unfavorable sudden shifts in discretionary consumer spending and the uncertainty regarding the timing of facility re-openings and the pace at which consumer spending at the company’s properties will recover.”

The research firm acknowledges an upgrade for MGM isn’t likely over the near-term. But it’s possible if the operator can effectively manage debt and fixed costs, among other considerations.